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Anchor stores like JCPenney and Macy's once drew crowds to suburban malls. Now their struggles could push hundreds of malls into extinction.
The novel coronavirus is crippling department stores, leading to a rash of bankruptcies and store closings. ...The novel coronavirus is crippling department stores, leading to a rash of bankruptcies and store closings. Malls will struggle to find replacement tenants for the large, multi-story buildings — known as anchor stores — that department stores occupy, at a time when most businesses are halting store growth. "We expect to see a lot of the space that goes vacant remain vacant for extended periods of time," said Kevin Cody, senior consultant for the commercial real estate firm CoStar Group. The loss of anchor stores can trigger co-tenancy clauses, which allow other mall tenants to break their leases or pay lower rent. Visit Business Insider's homepage for more stories. Hundreds of department stores are expected to close in the next 18 months, leaving a glut of empty real estate at shopping malls across the US that could be nearly impossible to re-occupy. Malls will struggle to find new tenants for space occupied by department stores, as businesses pull back sharply on spending and expansion amid the pandemic. "We expect to see a lot of the space that goes vacant remain vacant for extended periods of time," said Kevin Cody, senior consultant for the commercial real estate firm CoStar Group. This means many malls will be stuck with empty anchors. Anchors are the giant, multi-story buildings at mall entrances that have historically been responsible for a large portion of mall sales and foot traffic. The real estate research firm Green Street Advisors expects more than half of mall-based department stores to close by the end of 2021, leading to "excessive dark mall anchor space." "Widespread department store closures will accelerate the demise of many malls," the firm said in a recent report. "Many malls will be faced with multiple anchor vacancies, a tough place to come back from." Neiman Marcus, JCPenney, and department-store operator Stage Stores have all filed for bankruptcy in the last few weeks. Macy's said this week that its first-quarter sales fell by as much as 45% and that it expects to report a roughly $1 billion operating loss when it reports earnings in July. Nordstrom, another department store chain, has said it will close 19 locations, including 16 full-line department stores. Other mall-based stores are struggling, as well. J. Crew Group and the shoe chain Aldo filed for bankruptcy this month. L Brands said sales fell 37% in the most recent quarter and it plans to close 251 Victoria's Secret stores and 50 Bath & Body Works stores. Experts and analysts say this is just the beginning of a giant wave of closings and bankruptcies expected to sweep the retail industry. UBS recently estimated that about one in five clothing and accessories stores — or roughly 24,000 locations — will close in the next five years and pandemic hammers retailers. Department store losses can push malls into a downward spiral When anchors close, malls are put in the challenging position of finding new tenants for their biggest stores or facing sharp declines in business. Finding new tenants for stores that have multiple floors and take up more than 100,000 square feet will be particularly difficult at a time when most mall-based retailers are halting store growth following weeks of forced store closures. Even the highest-quality malls — referred to as "A" malls — will have a hard time finding replacement tenants for empty anchors, according to some experts. "If Neiman's rejects a lease, I don't know who's going to pick up that space," said Paul Steven Singerman, co-chair of the Florida-based bankruptcy and restructuring practice Berger Singerman. "That's a big bite in terms of space and a highly stylized interior that might not work for other 'A' retail-anchor types." The threat of a second wave of infections in the fall will prevent even many stronger retailers from making investments in expansion, he said. "I don't see a whole lot of retail sellers of goods reloading and making major capital investitures to open new stores now, not knowing when the social distancing and regulations limiting numbers of people in stores are going to be relaxed and whether we are going to make it through the autumn without a recurrence," he said. "I think it would be a pretty aggressive play [to open new stores]. Every retailer that we've talked to is trying to conserve cash." Malls have been battling the loss of anchors for years, as struggling department stores close or downsize locations. In best-case scenarios, malls have redeveloped anchor spaces and found tenants able to pay even higher rents, like restaurants or apartment complexes. But in the midst of a pandemic, it will be hard to find businesses willing to make major investments in redevelopment or expansion — especially for businesses with high exposure to e-commerce. "Department stores on the brink of bankruptcy, inline tenants struggling to make ends meet, and potential changes in consumer behavior (e.g., fear of public gathering places, accelerated e-commerce adoption) all point to long-term value impairment for malls," Green Street Advisors said. Other mall tenants can break their leases when anchors close With anchors standing empty for months or years on end, hundreds of malls could face a downward spiral in sales and rental revenues that may eventually put them out of business. Cowen analyst Oliver Chen has predicted that as many as 400 malls could close as retailers shut more stores permanently in response to the pandemic. "We expect stores may close in 10% or more of shopping centers, and the number of malls may eventually decrease to 800 or less from 1,200," Chen said in a recent note. He said retailers should expect in-store revenue to drop by 20% to 50% "for the foreseeable future." The loss of an anchor tenant can be particularly painful for malls because it often triggers co-tenancy clauses that allow other mall tenants to terminate their leases or renegotiate the terms, typically with a period of lower rents, until a new tenant moves into the anchor space. "When an anchor tenant moves out, many inline tenants could have in their contract that if that space is vacant, then they have the right to break their lease and just move out," Cody said. These clauses also may stipulate what type of retailers can re-occupy an anchor space, and prohibit mall owners from allowing retailers that are weathering the pandemic better than others — such as grocers or big-box stores — from taking over the empty space. The pandemic is accelerating the demise of weaker retailers In many ways, the pandemic is accelerating the trends that have been upending the retail industry for years. Department stores and apparel companies have for more than a decade battled weak demand stemming largely from the 2008 recession, evolving shopper habits, and the rise of e-commerce. This triggered a period known as the retail apocalypse for its high level of retail bankruptcies and mass store closures. The pandemic is now speeding up the shift to e-commerce and further weakening retailers that were already struggling pre-coronavirus. Manny Chirico, the CEO of PVH Corp., the owner of brands including Calvin Klein and Tommy Hilfiger, told CNBC last month that he expects 20% to 25% of all US stores to close in the next two to three years. Before the pandemic, he said he was expecting that level of closures to take place over six years. For many retail stores and shopping malls, this period will only hasten the inevitable — a large-scale decline in physical locations and in some cases, total extinction. SEE ALSO: Coronavirus could trigger a second coming of the retail apocalypse, with a new wave of bankruptcies and store closings expected to sweep the nation Join the conversation about this story » NOW WATCH: Why thoroughbred horse semen is the world's most expensive liquid
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